Split the difference

Recently separated saver now faces retirement on half of what she had envisioned

Phil Hossack / Winnipeg Free Press
Despite losing roughly half her portfolio when her marriage fell apart, Paulette�s retirement plan is by no means broken. She�s not as wealthy as she was previously but has no debts and considerable assets.

Paulette's finances

INCOME:

Civil servant pension: $28,648 ($2,016 net a month)

Part-time work: $20,626 ($1,221 net a month)

MONTHLY EXPENSES: $2,802

DEBTS: none

ASSETS:

Home: $140,000

Savings account: $15,500

TFSA: $27,199

RRSP: $113,889

Company shares: $1,711

Work pension: $4,587 ($135 a month at age 65)

NET WORTH: $302,886

Paulette has spent decades saving, only to see her plans for a comfortable early retirement recently disintegrate along with her marriage.

The 54-year-old retired public servant says she never spent freely and even saved for her ex-husband when he couldn't.

"All this money went into joint names, so I've had a major hit to my longtime retirement savings," says Paulette, who collects a pension of about $2,000 net a month while still working part-time, earning about $1,000 after taxes and deductions.

Now, she looks at a retirement portfolio that is roughly half of what she had imagined. All told, she has about $113,000 in RRSPs and another $27,000 in a TFSA -- mostly invested in fixed income mutual funds. She also has a small work pension with her current job and participates in an employee stock-purchase plan.

While she owns her home and carries no debt, Paulette can't help but fret about her future. She would like to retire entirely at 60, but she's concerned whether her savings and pension will suffice. If she can, she'd rather avoid taking CPP early.

"I'd like to hold off because of the penalty for taking it early," she says.

"If I didn't need it and I was in good health, I would probably put it off until age 65."

In part, her motivation for delaying CPP and saving so unfailingly is she worries she may need as much money as possible for later in life.

"I want to still have enough savings so I can have home care if I need it."

More than anything, Paulette is frustrated and feels her hard work has been in vain.

"To do the saving I did required a lot of sacrifice. I was very careful, and yet now I've taken this big hit. What now?"

"She has no debts and considerable assets for someone who's just gone through a separation," says the adviser with TFI Financial Services in Winnipeg.

Furthermore, Paulette has no need to be despondent about her finances. While she may not be as wealthy as she once was, she can likely retire comfortably at 60.

"Her expenses, excluding costs she won't have when she retires like contributions to savings, are about $2,000 a month, and she's making that now, net, on her pension alone."

Kraemer says she should consider rethinking her strategy to delay CPP, even if she will receive less money.

"She should probably take CPP at 60, simply because of that 'a bird in the hand is worth two in the bush' kind of thing."

Depending on the assumptions for tax and interest rates, if Paulette waited until age 65, it would take her until about age 82 before she would earn more benefits than receiving a lesser CPP payment at age 60.

While she says she has no health concerns, she may find less of a need for a higher CPP benefit later in life.

"Most people feel that they get more enjoyment and utility out of the money when they're younger than waiting when they're older and don't have the health or desire to do much with it."

But Paulette is also concerned about being able to afford care as she ages.

Because this form of care is subsidized in Manitoba based on income, saving more money will likely have little tangible benefit for her, Kraemer says.

"My experience with working with people in this situation is the more money you have, the more the government will charge you for available care services."

While private care is available, it may be more costly than Paulette can afford on her pension and savings.

For these reasons, Kraemer says Paulette should focus more on using her savings to enjoy retirement rather than worrying about the cost of care as she ages. That doesn't mean she should burn through her savings, and it's likely she wouldn't anyway because she's been a saver all her life and probably isn't going to change.

But her concerns about long-term care shouldn't determine her overall retirement strategy, he says.

Moreover, Paulette can probably keep saving if she wanted to when she retires at age 60, based on her pension income and CPP alone. Her combined income from these pensions will exceed her monthly expenses by a few hundred dollars every month.

If she needs more money, she can always draw on her TFSA and RRSP, which in about six years should be worth about $200,000, based on her continuing to contribute the maximum amounts and a modest return.

In addition, she will have a few thousand dollars in a savings account and money from her current work pension and employee stock purchase plan.

Even if she doesn't need extra income, Paulette should aim for a taxable retirement income up to about $43,000 to realize the tax savings from her RRSP. Her work pension and CPP will likely amount to about $35,000 gross, so she should withdraw from her RRSP an amount up to that threshold when possible.

"If she can stay below about $43,000 in retirement, her marginal tax rate would be about 28 per cent," Kraemer says. "Right now she's putting money into her RRSP that would be taxed at about 35 per cent, so she'd save about seven per cent."

Paulette doesn't need to spend the withdrawals. Additional money can be reinvested, but early withdrawals will help reduce her taxes later in retirement. The RRSP withdrawals could also supplement her income until she can collect OAS, a few months after she turns 65.

Because she was born in 1959, Paulette's first OAS benefit will be delayed between five and 11 months, depending on the month in which she was born, under the new OAS rules.

"We've seen a long bull market in bonds, but now with interest rates expected to increase, there's the threat of a decrease in the value of many income funds."

One strategy is reallocating a portion of her money into equities -- the stock market -- to guard against rising rates. Or, she could invest in GICs, which aren't susceptible to interest rate hikes. But she would have to accept a lower return for that stability and a loss of purchasing power to inflation.

Overall, however, Paulette is in good financial shape for retirement, Kraemer says.

"She's done a wonderful job being debt-free with a net worth well over $300,000," he says.

"And that doesn't even count the biggest asset from her pension, which has a commuted value roughly upward of half a million dollars."

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